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Supervisory, regulatory, and capital adequacy implications of profit-sharing investment accounts in Islamic finance

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Purpose – The aims of this paper are: first, to draw attention to the issues of displaced commercial
risk (DCR) which arise as a result of the risk characteristics of profit-sharing investment accounts
(PSIA), the main source of funding of Islamic banks in most jurisdictions; and, second, to present a
value-at-risk approach to the estimation of DCR and the associated adjustments in capital
requirements.
Design/methodology/approach – The paper is based on empirical research into the characteristics
of PSIA in practice, which vary to a greater or lesser extent from what one would expect them to be in
principle, on an analysis of the capital adequacy and risk management implications that flow from this,
and on an econometric formulation whereby the extent of DCR in Islamic banks may be estimated.
Findings – The findings are, first, that the characteristics of PSIA can vary from being a deposit like
product (fixed return, capital certain, all risks borne by shareholders) to an investment product
(variable return, bearing the risk of losses in underlying investments), depending upon the extent to
which the balance sheet risks get shifted (“displaced”) from investment account holders to
shareholders through various techniques available to Islamic banks’ management. Second, the paper
finds that this DCR has a major impact on Islamic bank’s economic and regulatory capital
requirements, asset-liability management, and product pricing. Finally, it proposes an econometric
approach to estimating DCR but report that individual Islamic banks generally lack the data needed to
apply this approach, in the absence of which panel data for a population of Islamic banks may be used
to estimate DCR for that population.
Research limitations/implications – Empirically, the paper is thus limited by the lack of data just
mentioned. Furthermore, the application of the proposed panel data approach has been left for future
research.
Originality/value – The analysis of the issues and the development of the econometric model
represent in themselves an original research contribution of some significance.

Keywords Profit, Investments, Financial risk, Finance, Banks, Islam

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Informasi Detail

Judul Seri

Journal of Islamic Accounting and Business Research

No. Panggil

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Penerbit

: Emerald Group., 2010

Deskripsi Fisik

Journal of Islamic Accounting and Business Research Vol. 1 No. 1, 2010 pp. 10-31

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

Versi lain/terkait

Lampiran Berkas

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